Limited Liability Companies

Limited Liability Companies

Frank Wood, Principles of Accounts for the Caribbean, Chapter 38

CSEC Objectives - Section 9

ACCOUNTING FOR LIMITED LIABILITY COMPANIES

• identify the essential features of limited liability companies,

• identify the types of limited liability companies,

• outline the advantages and disadvantages of a limited liability company;

• describe the various methods of raising capital available to limited liability companies

• identify the various types of shares and the rights of the owners of each type of share;

CSEC Objectives - Section 9

ACCOUNTING FOR LIMITED LIABILITY COMPANIES

• prepare journal entries to record the issue of shares and debentures;

• calculate dividend payments for various types of shares;

• appropriate profits between dividends and reserves;

• *prepare the final accounts of limited liability companies

A limited liability company is an organisation owned by shareholders, whose liability is limited to its share capital.

Definition

Share capital refers to the funds that a company raises from selling shares to investors.

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​Share Capital

These are persons who contribute capital to the business. Therefore, shareholders own the company.

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Shareholders

This means that the losses that owners (shareholders) of a business may incur are limited to the amount of capital invested by them in the business and do not extend to their personal assets.

​Limited Liability

• Capital raised on the issue of shares

• Must have an audit and publish accounts

• Run by directors who are not necessarily the shareholders

• Directors are appointed by the shareholders

• Unlimited owership (shareholders)

• Limited liability

• Shareholders receive a dividend as their share of profit

• Risk is limited to the amount invested in shares

• Separate legal entity from its owners

Essential Features of LLC

Match

Match the following

• Share capital

• Shareholders

• Limited liability

• Unlimited liability

Funds raised by a company

Contributes capital and hence owns the company

Liability does not extend to personal assets

Liability extends to personal assets

• Funds raised by a company

• Contributes capital and hence owns the company

• Liability does not extend to personal assets

• Liability extends to personal assets

Types of Limited Liability Companies

​Documents Required

With the formation of limited liability company, certain documents have to be filed with the Registrar of Companies. Two main documents are:​

• Memorandum of Association – this document discloses the terms and conditions governing the company’s relationship with the outside world (e.g. name of company, location, amount of share capital, etc.)​

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​Documents Required

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• Articles of Association – discloses the terms and conditions governing the internal operations of the company (e.g. powers and duties of directors, holding of shareholder meetings, etc.)​

Advantages and Disadvantages

Advantages​

• Ease of raising capital​

• Limited liability of the shareholders​

• Transfer of ownership without affecting operations​

• Perpetual existence/continuity ensured​

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Disadvantages​

• Double taxation​

• Risk of takeover or Loss of Control​

Methods of Raising Capital

The two main sources of finance for limited companies are:

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1. Shares - Shares are company-owned capital.

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2. Debentures ​- Debentures are the borrowed capital of the company

​Share Capital

When a company is formed, the maximum amount of shares that can be issued is referred to as the authorized share capital, whereas the amount of shares actually issued is referred to as the issued share capital.​

​Share Capital

Types of Shares and the Rights of the Owners of Each Type of Share

​Types of Shares

The most common type of shares are 

1. ​Ordinary shares​

2. Preference shares

• Entitled to vote to elect the board of directors and to vote on important issues of the company.

• The rate of dividend paid is not fixed and has to be declared by the board of directors.

• Dividends are dependent on profits.

• Bear the most risk.

• Dividends are paid after payment has been made to preference shares 

​Ordinary Shareholders

• Not entitled to vote.

• Fixed rate of dividends.

• Dividend not dependent on profits.

• Bear little or no risk

• Dividends paid before ordinary shares.

​Preference Shareholders

Multiple Choice

Receives dividends first

• preference

• ordinary

Multiple Choice

Dividend received depends on profit made.

• preference

• ordinary

Multiple Choice

Have a say on who is elected as the board of directors

• preference

• ordinary

Multiple Choice

This is the maximum amount of shares that a company is allowed to issue.

• authoried share capital

• issued share capital

Multiple Choice

Entitled to a fixed rate of dividend

• preference

• ordinary

Fill in the Blank

The amount given to shareholders as their share of the profits of the company

Multiple Select

Dividend is paid to the preference shareholders depending on the profit percentage.

• True

• False

​Share Capital continued

Martha Ltd. has a capital of $400,000 which comprises

• 400,000 shares at $1 per share or

• 200,000 shares at $2 per share​

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The value of each share ($1 and $2) is called the nominal or par value of the shares.​

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Nominal or par value - a monetary value attached to a share

If shares are issued at a price above the nominal value, the difference is called the share premium.​

Calculating Dividend Payments for Various Types of Shares

Dividends

When a company makes a profit, the directors will have to decide how this is to be used. They will probably retain part of the profit as reserves, which will be used to expand the business. The remaining part is likely to be used to reward the shareholders for investing in the company. This share of the profits is known as the dividend. The dividend is usually shown as a percentage.

Fill in the Blank

A limited company has 200 000 ordinary shares of $1 each. A dividend is declared at 6%. How much will the company pay out in dividends?

Fill in the Blank

A limited company has 200 000 ordinary shares of $1 each. A dividend is declared at 6%. A shareholder has 1000 shares. How much dividend will he receive?

Fill in the Blank

A limited company has 200 000 ordinary shares of $2 each. A dividend is declared at 8cents per share. How much will the company pay out in dividends?

Fill in the Blank

A limited company raised $500 000 from issuing ordinary shares with a nominal value of 50 cents each. A dividend is declared of 2cents per share. How much will the company pay out in dividends?

​5% preference shares

​Fixed rate of dividend

Fill in the Blank

A limited company has 300 000 8% preference shares of $1 each. A dividend is declared. How much will the company pay out in dividends?

Fill in the Blank

A limited company has authorised share capital of:

- 500 000 ordinary shares of 50 cents each

- 200 000 5% preference shares of $1 each

The company had actually issued 80% of its ordinary shares and 50% of its preference shares. During the year ended 31 March 2018, the company declared and paid an ordinary dividend of 2cents per share and the preference dividend due.

Calculate the amount of dividends paid by the company during the year.

Multiple Choice

Shareholders are :

• Customers of the Company

• Owners of the Company

• Creditors of the Company

• None of these

Multiple Choice

The capital of a company is divided into units which are called :

• Debenture

• Share

• Stock

• Bond

Multiple Choice

Shareholders receive from the company :

• Interest

• Profit

• Commission

• Dividend

Multiple Choice

To whom the dividend is given at a fixed rate in a company?

• To equity shareholders

• To preference shareholders

• To debenture holders

• To promoters